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Simplicity and low costs - that's real pension freedom

Merryn Somerset Webb, Financial Times, 28 October 2016

Budgets are boring. Financial journalists hate them. The speeches are too long. They mostly contain policies that fiddle around the edges and which have been flagged way too far in advance. And on the odd occasion that something comes as a surprise, it turns out to be not very interesting once you get into the detail.

But every now and then, a chancellor says and actually does something that changes people's lives. So it was with George Osborne's Budget of March 2014 and the introduction of pension freedoms. He announced that he was totally over the "patronising view that pensioners can't be trusted with their own pension pots".

Henceforth, the over-55s would be able to take back financial control. Subject to paying their marginal rate of income tax on withdrawals, they would be able to draw down whatever they wanted from their pots whenever they wanted. The idea went down very well indeed - and not just with those of us looking for fun stuff to write columns on. New numbers out for the last quarter show that another £1.5bn has been withdrawn by 158,000 people, bringing the total so far to £7.65bn.

Providers weren't obliged to report withdrawals until April this year, so it will be another few quarters until we have a full annual picture. However it is safe to say that there has been what AJ Bell calls a "seismic shift" away from annuities. The default option for retirement is now flexible withdrawal.

The problem here is that take up in itself can't be used to decide whether this is a successful policy or not ("popular" is not the same as "good"). Figuring that out depends on knowing a few more things - notably how much people are withdrawing as a percentage of their total pension savings; how old they are when they start withdrawing it; and what they do with the cash when they have it.

In an ideal world, people would have carefully worked out how much of their total pot they can spend each year. They wouldn't start spending at all until they hit what most of us consider to be retirement age (65+) and they most certainly wouldn't be withdrawing it to pay for the capital expenses of middle age (kids' university fees and house deposits, for example).

This week's numbers suggest the news is not encouraging. The average withdrawal per person is still about £10,000, which seems high given that the average pension fund in the UK is worth a pathetic £40,000. Worse, one in three people are taking the money out and just leaving it in savings accounts. This is nuts: why take money out of a wrapper in which it can grow 100% tax-free to stick in a low interest bank account where the returns haven't a hope of even matching inflation?

The age of those liberating their pension is also concerning. When it comes to pensions, a bird in the hand is rarely worth two in the bush: you want to start spending your money as late as possible rather than at what should be near your peak earning age (55).

George Osborne should, I think, have used the smoke screen of pension freedom excitement to at least have aligned the drawdown age with the state pension age. Still, the good news here (according to Aegon research) is that 80% of those aged 55-65 say they aren't planning to withdraw their pension savings in the immediate future.

The bad news is that 11% of 55-59 year olds already have: in the last quarter of 2015 they took an average 10% plus of their pot. If they aren't careful, they could very easily find themselves joining the 34% of recent retirees who, research from the Pru suggests, "regret financial decisions they have made since stopping work".

Now for some more good news. When pension freedoms were first mooted, my first thought was this might just be the catalyst for the shake-up that the UK fund management business needs. Before the Budget bombshell, most people focused on the treatment of their pension savings for one day and one day only - the day they chose which annuity provider to gift their savings to.

Now, they are going to focus for a whole lot longer: if they don't buy a secure income stream, they will have to pay attention for the entire 30-odd years of their retirement. In the knowledge that they will be doing that, I suspect they will pay a lot more attention than they have in the past during the 40-year run up to retirement too. They're also going to ask different questions. The obvious one being: if the income on my savings (on which I intend to live forever) is 4% of my assets, don't you think that you charging 1% - which is 25% of my return - is a little OTT? How's that for a challenge to an industry used to living on other people's lethargy?

My hope was that pension freedoms would usher in a new world of simple and low-priced products in the UK. This stuff doesn't happen overnight. But it looks like the opening shots are finally being fired. This week, Daniel Godfrey - the ex-chief executive of the Investment Association - announced plans to launch a new investment trust, The People's Trust.

It is to be a fund for all those who think investment "isn't for them" (ie the ones taking money out of perfectly good pension wrappers and shoving it into savings accounts). He's hoping to produce 7% annual returns with the kind of approach I always say I approve of ("long-term, high-conviction, low-turnover, high-engagement") and to make the charges as transparent and low as possible. He's also having a go at getting the wary involved by asking them to become "founders" for £20 to help get the thing off the ground.

Mr Godfrey hasn't got off to a 100% good start on the PR front: there is another Daniel Godfrey on Twitter, a Californian singer for a band called I Am The Icarus, who, after a few misdirected tweets has started referring to our Godfrey's supporters as "dorks". However, if the launch goes as planned and the trust lives up to most of his promises it could be an excellent vehicle for the many millions of new investors in the market.

While we wait to hear how that pans out, here's what I am planning to do with my own pension: keep saving into my SIPP until there is enough there to provide a base income in retirement. And here's what I am not planning to do: take any of it out or spend a penny of it until I hit an age at which I actually can't earn a full living any more. I'm thinking more 70 than 55. Doing anything else is for dorks.

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